Journal of Marketing Management Vol. 26, Nos.

910, August 2010, 842857

The impact of customer relationship management capability on innovation and performance advantages: testing a mediated model
Moustafa Battor, Tanta University, Egypt Mohamed Battor, Tanta University, Egypt
Abstract Customer relationship management (CRM) and innovation are widely considered to be valuable capabilities associated with competitive advantage. However, there is a lack of research demonstrating how they work together to produce performance advantages. This research investigates the mediating role of innovation between CRM and performance. The authors examine the direct impact of both CRM and innovation on firm performance. Moreover, they investigate the role of innovation as a mediating mechanism to explain the effect of CRM on performance. The authors use structural equation modelling to test the relationships among these constructs. The results support the direct impact of CRM and innovation on performance. Also, the findings indicate that the indirect effect of CRM on firm performance through innovation is significant. These results reinforce the view that developing close relationships with customers enhances a firms ability to innovate. Keywords innovation; CRM; customer relationship management; performance

Introduction
Developing a superior customer relationship management (CRM) capability that is, creating and managing close customer relationships is expected to be one of the most important sources of superior performance in todays competitive business environment (Day, 2000; Kale, 2004). Capital One, for example, has significantly outperformed First USA with a strategy that leverages their superior CRM capability. Despite being half the size of First USA, Capital One earned 40% more interest income from each customer and enjoyed double the profit margin (Day, 2002). Amazon is another good example. Nearly 59% of Amazon.coms sales come from repeat customers. This is because Amazons strategy is to keep its customers loyal (Peppers, Rogers, & Dorf, 1999). Generally, attracting new customers costs five times as much as keeping or managing existing ones, which means that existing customers contribute five times more sales than new customers do (Ko, Kim, Kim, & Woo, 2008). Therefore, beyond designing strategies to attract new customers and create transactions with them, organisations recognise the importance of retaining current
ISSN 0267-257X print/ISSN 1472-1376 online # 2010 Westburn Publishers Ltd. DOI:10.1080/02672570903498843 http://www.informaworld.com

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customers and building lasting customer relationships (Kotler, Armstrong, Saunders, & Wong, 1999). Innovation is also an important organisational capability, because successful new products are engines of growth and provide increased sales, profits, and competitive strength for most organisations (Pauwels, Silva-Risso, Srinivasan, & Hanssens, 2004; Sivadas & Dwyer, 2000). Robust findings uniformly suggest that a positive and direct relationship exists between innovation and superior performance (e.g. Baker & Sinkula, 1999; Calantone, Cavusgil, & Zhao, 2002; Han, Kim, & Srivastava, 1998; Hult, Hurley, & Knight, 2004; Hurley & Hult, 1998; Keskin, 2006; Panayides, 2006; Thornhill, 2006). However, the failure rate of new products is somewhere between 40% and 75%, and nearly 50% of the new products that are introduced each year fail. Organisations thus must not only innovate consistently to remain competitive, but must also seek to reduce the risks associated with innovation (Joshi & Sharma, 2004; Pauwels et al., 2004; Sivadas & Dwyer, 2000). Organisational capabilities for successful product innovation encompass firms abilities to understand customer preferences and needs, to acquire and assimilate external knowledge, and to transform it into new or improved products (Branzei & Vertinsky, 2006; Joshi & Sharma, 2004; Marinova, 2004). In that sense, CRM plays an important antecedent role in a firms ability to innovate. At its most basic level, CRM is a firms ability to translate customer data into customer relationships through active use of, and learning from, the information collected (Brohman, Watson, Piccoli, & Parasuraman, 2003). Firms with superior CRM capability are in a better position to gather and store customer knowledge. They can track customer behaviour to gain insights into customers tastes and evolving needs. Firms with greater deployment of CRM applications thus will be better able to design and develop innovative products and services due to an enhanced customer understanding (Brohman et al., 2003; Mithas, Krishnan, & Fornell, 2005). Although the existing literature has acknowledged the importance of CRM and innovation to performance, insufficient attention has been paid in this literature to address how they work together to achieve higher performance. Also, although prior conceptual work has suggested that CRM can enhance an organisations innovation, empirical evidence is sparse. Therefore, the key questions addressed by our research are how CRM and innovation interact to affect performance and whether CRM fosters innovation. More specifically, we study the CRMinnovationperformance chain, and examine both direct and indirect (through innovation) effects of CRM capability on performance. The paper is organised as follows. The theoretical background and hypotheses are presented in the next section. We then describe the research method and the scale development and validation. Next, we present the results of testing the structural model. Finally, we discuss the implications and limitations of our study, and offer directions for future research.

Theoretical background and research hypotheses

Innovation Many definitions of innovation have been proposed. For example, Hult et al. (2004, p. 429) describe innovation as the introduction of new processes, products, or ideas in

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the organisation. Drucker (2001, p. 22) proposes that innovation is a different product or service creating a new potential of satisfaction, rather than an improvement. Innovation is defined as a process that begins with an idea, proceeds with the development of an invention, and results in the introduction of a new product, process, or service to the marketplace (Thornhill, 2006, p. 689). Innovation usually involves something new. It involves doing new things or finding new ways of doing things to change the rules of the game (Keskin, 2006; Porter, 1985). Porter (1985, p. 164) recognises innovation as one of the principal drivers of competition. Drucker (2001, p. 21) argues that distinctive capabilities are different for every organization; they are part of an organizations personality. But every organization needs one core capability: innovation. These quotations leave little doubt that innovation has been, and will continue to be, a key capability of interest to firms. Innovation plays a key role in the survival and success of any organisation in the face of todays seemingly accelerating and changing market environment (Francis & Bessant, 2005; Han et al., 1998). For firms to survive and prosper in turbulent and unpredictable environments, new things have to be done or new ways have to be adopted in doing things that are already being done (i.e. to be innovative) (Keskin, 2006). The impact of innovation on performance has been examined extensively in prior research, and considerable empirical evidence of a positive impact has been accumulated (e.g. Baker & Sinkula, 1999; Calantone et al., 2002; Han et al., 1998; Hult et al., 2004; Hurley & Hult, 1998; Keskin, 2006; Panayides, 2006; Thornhill, 2006). For example, Francis and Bessant (2005), by reviewing the literature, conclude that management research suggests that innovative firms are, on average, twice as profitable as other firms. Also, a study of 700 companies, which launched a total number of 13,311 new products between 1976 and 1981, reported that 22% of profits and 28% of sales growth came from new product launches. The trend was predicted to rise to 31% profits and 37% sales (Zairi, 1995). Thus the following hypothesis is proposed:
H1: Higher levels of innovation are associated with higher levels of performance.

CRM capability The origins of CRM can be traced to the relationship-marketing literature. Introduced by Leonard Berry in the early 1980s, the concept of relationship marketing was defined as attracting, maintaining, and enhancing customer relationships (Berry, 2002). Kotler et al. (1999) define CRM as retaining current customers and building profitable, long-term relationships with them. Recently, Day (2002) conceptualised CRM as a firm capability that results from a focus on three organisational components working in concert with each other: an organisational orientation that makes customer retention a priority; a configuration that includes the structure of the organisation, its processes for personalising product offerings, and its incentives for building relationships; and information about customers that is in-depth, relevant, and available in all parts of the company. The terms customerlinking capability (Day, 1994), customer-relating capability (Day & Van den Bulte, 2002), and CRM capability (Srinivasan & Moorman, 2005) are used interchangeably to describe a firms ability to outperform its rivals by creating and managing close customer relationships (Day, 1994).

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CRM capability and performance Day (1994) described CRM capability as a valuable and difficult-to-imitate source of superior performance. CRM capability is much more difficult to understand and imitate than most capabilities because it takes time to develop, relies on the complex interplay of supporting resources, and is based primarily on tacit knowledge and interpersonal skills (Hooley, Greenley, Cadogan, & Fahy, 2005). In addition, building stronger relationships with customers provides the basis for understanding the evolving requirements of customers and identifying the most appropriate ways of satisfying customers better than competitors, which can provide greater opportunities for realising superior performance (Day, 1994). Compelling evidence exists that retaining customers leads to positive business performance. In their seminal study, Reichheld and Sasser (1990) find that a 5% increase in customer retention rates increases profits by 25 to 85%, depending upon the industry. The cost of keeping current customers is much lower than that of winning new ones (Reichheld, 1996; Reichheld & Sasser, 1990), and many new relationships are often unprofitable in the early years (Kotler et al., 1999; Reichheld, 1996). Only later, when the cost of serving loyal customers falls and the volume of their purchases rises, do relationships generate big returns. Longterm customers buy more, are cheaper to serve, take less of a companys time, pay less attention to competing brands, provide new referrals through positive word of mouth, and buy other products offered by the company (Kotler et al., 1999; Reichheld, 1996). Recently, several studies provide evidence of a positive association between customer relationship and business performance. For example, a recent special section in the Journal of Marketing finds that customer-relationship activities enhance firm performance in eight of the ten papers published (Boulding, Staelin, Ehret, & Johnston, 2005). Also, Day and Van den Bulte (2002) find that CRM capability is an important determinant of superior performance. Similar findings are reported by Hooley et al. (2005). Thus the following hypothesis is proposed:
H2: Higher levels of CRM capability are associated with higher levels of performance.

CRM capability and innovation The role customers can play in idea generation or product conceptualisation is being increasingly acknowledged in the management literature (e.g. Campbell & Cooper, 1999; Nambisan, 2002). The Marketing Science Institutes (MSI) 20062008 research priorities include the topic of the customers role in innovation as the first research priority. A survey by the MSI shows that innovation continues to be viewed as the prime engine of growth, but customers play a much larger role in shaping innovation strategy and execution [and] at the development level, customer insights are needed to drive innovation and product and service design (MSI, 2006, p. 3). A new product-development strategy is an information-processing procedure (Liu, Chen, & Tsai, 2005). In that sense, CRM can be considered an innovative management strategy (Ko et al., 2008). Porter (1990, p. 86) argues that through building close relationships with customers, information flows freely and innovations diffuse rapidly. Having close relationships with customers can help the firm take advantage of short lines of communication, a quick and constant flow of information, and an ongoing exchange of ideas and innovations (Porter, 1990).

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Firms deploying CRM can track customer behaviour to gain insight into customer tastes and evolving needs (Mithas et al., 2005; Vickery, Jayaram, Droge, & Calantone, 2003). With currently available technology, CRM applications allow the firm to learn about customer preferences in real time, continuously update the firms knowledge of customer preferences, and analyse customer insights (Sun, 2006). Firms with superior CRM capabilities are in a better position to collect, organise, and prioritise customer information and transmit this information to the product-development team. By integrating this information in the product-development process, firms can create an incremental innovation or develop a product to satisfy growing or evolving customer needs (Zahay, Griffin, & Fredericks, 2004). Customer information obtained from CRM, then, is a valuable intellectual asset for a company to improve its ability to innovate products that meet or even exceed customers requirements (Su, Chen, & Sha, 2006). Many examples exist of firms that have successfully used customer knowledge as a key component of their innovation strategies. For example, FedEx adopts an outsidein approach to create innovative products. That means FedEx discovers its customers wants and needs, and focuses innovation activities in those areas. By allowing innovation to be customer driven, FedEx has developed innovative ways to meet customers needs (Battor, Zairi, & Francis, 2008). Microsoft is another good example of the positive relationship between customer knowledge and innovation. Microsoft established beta sites to seek customer knowledge in all development phases of new software, from generating product specifications to the final check of the product before its release. For example, more than 650,000 customers tested a beta version of Microsofts Windows 2000 and shared with Microsoft their ideas for changing some of the products features (Prahalad & Ramaswamy, 2000). Microsoft attributes its sustained success to its vigorous pursuit of customer knowledge in new product development (Li & Calantone, 1998, p. 13). Based on the above discussion, the following hypothesis is proposed:
H3: Higher levels of CRM capability are associated with higher levels of innovation.

Research design
Data collection We used the FAME database of UK companies as our sampling frame. FAME provides detailed financial and accounting information for 1.8 million firms registered in the UK (Nachum, 2003). We used a systematic random sampling method to draw a sample of 1000 companies with more than 50 employees from this database. To improve the validity of the survey questions and the response rate, we followed the general recommendations of Churchill (1979), Conant, Mokwa, and Varadarajan (1990), and Dillman (1978) to design and administer the survey. The questionnaire used to collect the data was pretested twice (Churchill, 1979; Conant et al., 1990). First, a pretest involving five academics and three executives was conducted to assess the face and content validity of the measurement items. Consequently, a small number of modifications to the questionnaire were made in order to clarify the intent of specific questions. Second, a pilot study was performed to confirm the appropriateness of the survey administration (Hair, Bush, & Ortinau,

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2003). After some modifications, the final questionnaire was mailed to CEOs or managing directors together with a return prepaid envelope and a personalised covering letter explaining the purpose of the study and its potential value, and emphasising the confidentiality of the respondents (Dillman, 1978). We directed the survey to CEOs because previous studies have shown that such high-level executives are generally reliable in their evaluations of their firms activities and performance (Hooley & Greenley, 2005). We used a three-wave mailing approach based on the recommendations of Dillman (1978). A total of 204 respondents returned questionnaires, but 24 were omitted from analyses due to missing data, leaving a total of 180 completed questionnaires. This response rate is reasonable given that the targeted respondents were high-level executives who usually operate under time constraints (Wu, Balasubramanian, & Mahajan, 2004). Measures We measured the three constructs (CRM capability, innovation, and business performance) by multiple-item scales adapted from previous studies. All items were operationalised using a five-point Likert-type scale. While CRM and innovation items ranged from strongly disagree (1) to strongly agree (5), performance items ranged from much worse than competitors (1) to much better than competitors (5). All the scale items are provided in the Appendix. CRM capability In conceptualising CRM capability, we follow Day (2002) defining it as a second-order construct that consists of three first-order components relationship orientation, configuration, and customer information measured by four, four, and six items respectively. We borrowed or adapted these items from Day (2002), Reinartz, Krafft, and Hoyer (2004), and Jayachandran, Sharma, Kaufman, and Raman (2005). Innovation The original Booz Allen Hamilton (1982) scale of innovation is used in this study. In spite of recent attempts to develop an innovation scale, the original Booz Allen Hamilton (1982) scale of innovation is widely used in the literature (Darroch, 2005). Booz Allen Hamilton identified six categories of products ranging from newto-the-world products to cost reductions. Business performance The literature shows that performance is both objectively and subjectively measured. Objective measures use the absolute values of the firms actual performance. Subjective measures ask respondents to assess their companies performance relative to that of their competitors (Greenley, 1995). For this study, subjective measures were used for the following reasons. First, objective measures are difficult to gather due to firms unwillingness to disclose financial information (Haugland, Myrtveit, & Nygaard, 2007). Second, many researchers have reported a strong association between objective measures and subjective responses (e.g. Dess & Robinson, 1984; Jaworski & Kohli, 1993). Third, objective measures are difficult to compare across companies due to different accounting conventions (Ottum & Moore, 1997). In obtaining subjective assessments of a firms performance, the measures are more likely to accurately reflect a firms true position when captured as relative to competitors

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rather than as an absolute value (Slotegraaf & Dickson, 2004). Fourth, subjective measures are particularly useful for assessing the non-financial dimensions of performance (Stam & Elfring, 2008). However, we followed prior research and operationalised business performance as a two-dimensional construct: market performance and financial performance (e.g. Spanos & Lioukas, 2001). Market performance was assessed with four items reflecting customer satisfaction, customer retention, market share, and sales growth, whereas financial performance was measured with return on investment and profitability. For all these items, respondents were asked to indicate their firms performance relative to their major competitors.

Analysis and results

Adapting Anderson and Gerbings (1988) two-step approach, we developed separate measurement models before conducting tests of the hypothesised relationships between constructs. First, the psychometric properties (reliability, convergent and discriminant validity) of the constructs used in this study were evaluated. Then, structural equation modelling (SEM) was used to test the hypothesised relationships between constructs. We used a combination of SPSS (V14.0; SPSS, Inc., Chicago, IL) and AMOS (V6.0; SPSS, Inc.) software packages to carry out the analysis. Reliability and validity of the measurement scales To establish the internal consistency of the measures, we computed Cronbachs alpha coefficients to estimate the reliability of each scale. We dropped items with low itemto-total correlation from subsequent analysis. The item-total correlation analysis for the innovation scale indicated that two items should be excluded from further analysis. For the CRM construct, the reliability analysis resulted in the configuration component being dropped from further analysis, as well as one item from the relationship-orientation component and two items from the customer-information component due to a low item-to-total correlation. This results in CRM capability being measured by only two components. In the case of performance, one item was dropped from the market-performance component. The estimated reliabilities for the refined scales are .90 for innovation, .82 for CRM capability, and .86 for performance. As all scales achieved a Cronbachs alpha greater than the .70 level recommended by Nunnally (1978), the reliability of the measurements is established. The remaining items for each scale were submitted to an exploratory factor analysis (EFA) to investigate its unidimensionality and underlying factor structure. We performed EFAs using principal components analysis with Varimax rotation. For the innovation items, EFA yielded a one-factor solution that accounted for 78% of the variance extracted. For the CRM items, EFA yielded a two-factor solution that accounted for 81% of the total variance. All items loaded highly on their intended constructs. Finally, a factor analysis of the business-performance items revealed a twofactor solution, which accounted for 94% of the variance extracted. All items loaded highly on the appropriate construct and there were no significant cross-loadings. We subsequently conducted confirmatory factor analysis (CFA). For this research, we chose to separate the measurement model from the structural model. According to Sujan, Weitz, and Kumar (1994), including all the constructs would result in a model too complex to be estimated easily. We, therefore, performed three separate

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measurement models: CRM, innovation, and business performance. This approach was selected to allow for a direct test of the dimensionality of the constructs (Hult et al., 2004), to avoid violating recommended minimal sample-size-to-parameterestimate ratios (Baker & Sinkula, 1999), and to assess the reliability, discriminant validity, and convergent validity of the constructs (Sujan et al., 1994). This approach is also consistent with prior research (e.g. Baker & Sinkula, 1999; Hooley et al., 2005; Hult et al., 2004; Jayachandran et al., 2005). For the three constructs, the CFA results show that all indicators loaded significantly on their corresponding latent construct. Also, the three measurement models fit well as indicated by the CFA results for the CRM construct (w2 21.742, degrees of freedom [df] 11, p .026, goodness-of-fit index [GFI] .968, adjusted goodness-of-fit index [AGFI] .918, TuckerLewis index [TLI] .980, comparative fit index [CFI] .990, root mean square error of approximation [RMSEA] .074), the innovation construct (w2 1.932, df 1, p .165, GFI .993, AGFI .957, TLI .989, CFI .996, RMSEA .074), and the performance construct (w2 7.732, df 4, p .102, GFI .984, AGFI .941, TLI .992, CFI .997, RMSEA .072). Within the confirmatory factor analysis, we calculated the composite reliability following the procedures that Fornell and Larcker (1981) suggest. Composite reliability is similar to Cronbachs alpha, but it estimates consistency on the basis of actual construct loadings (White, Varadarajan, & Dacin, 2003). As shown in Table 1, the composite reliabilities for the three scales ranged from .88 to .92, exceeding acceptable levels for construct reliability (Bagozzi & Yi, 1988; Fornell & Larcker, 1981; Nunnally, 1978). To examine the convergent validity for the three constructs, we computed the average variance extracted (AVE) by the indicators corresponding to each of the three constructs. The AVE is the amount of variance that is captured by the construct in relation to the amount of variance due to measurement error. If the AVE is less than .50, the variance due to measurement error is larger than the variance captured by the construct, and the validity of the individual indicators, as well as the construct, is questionable (Fornell & Larcker, 1981). Therefore, convergent validity is established if the AVE for each construct accounts for .50 or more of the total variance. As shown in Table 1, the AVE exceeded the recommended level of .50 for CRM (.78), innovation (.71), and performance (.84), providing evidence for convergent validity. We also found support for convergent validity because all the standardised factor loadings were relatively high and statistically significant at the 1% level (Anderson & Gerbing, 1988). We examined discriminant validity following the procedure recommended by Fornell and Larcker (1981). They suggest that discriminant validity is established for a construct if its AVE is larger than its shared variance with any other construct. We compared the AVE with the highest variance that each construct shared with the other

Table 1 Properties of measurement models.

Composite reliability .88 .88 .92 Average variance extracted 78% 71% 84% Highest shared Standardised factor variance loadings* 13% .80.95 13% .76.89 12% .86.94

Construct CRM Innovation Performance

*All factor loadings are significant at the .01 level.

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constructs. The AVE for each construct was always greater than the highest shared variance (see Table 1). Collectively, these tests provide support for the robustness of our measures. Research-model testing After confirming the appropriateness of the measurement models, we used structural equation modelling to test our hypotheses with the maximum likelihood estimation method. Before testing the hypotheses, we examined a correlation matrix for the scales of the major constructs (see Table 2). As expected, there is a significant, positive correlation among CRM, innovation, and performance. Also, to check for nonnormal distributions, we examined the skewness and kurtosis of the final measures. All the measures had normal distributions with deviations from normality within acceptable ranges, suggesting that the data did not violate the normality distribution (Curran, West, & Finch, 1996). Following Bagozzi and Heatherton (1994), the reduced forms of the constructs are used in order to simplify the model. For each first-order construct, a composite score was created by averaging the scores of its measurement items. Thus we aggregated the innovation scale to have a single indicator, the CRM scale to have two indicators (customer information and relationship orientation), and the performance scale to have two indicators (financial performance and market performance). Because we used a single indicator for innovation construct, we fixed its factor loading to the square root of the construct reliability, and its error variance to (1 construct reliability) construct variance to account for measurement error (Bagozzi & Heatherton, 1994). SEM results of the relationship between the constructs operationalised in this study are summarised in Table 3. The results of SEM analysis indicate a good overall fit with the data (w2 5.853, df 3, p .119, GFI .987, AGFI .936, TLI .972, CFI .992, RMSEA .073). Since these indexes are acceptable, we concluded that the structural model is an appropriate basis for hypothesis testing. The results support the three hypotheses and, in particular, confirm the mediating role of innovation. The results indicate that innovation significantly and positively
Table 2 Correlations and descriptive statistics.
Variable CRM Innovation Performance CRM .36* .32* Innovation Mean 3.096 3.589 3.194 Standard deviation .852 .775 .894 Skewness .380 .247 .237 Kurtosis .079 .847 1.092

.35*

*Correlation is significant at the .01 level.

Table 3 Results of the test of structural equation model.

Hypotheses Hypothesis 1: Innovation ! Performance Hypothesis 2: CRM ! Performance Hypothesis 3: CRM ! Innovation Standardised coefficient .29 .24 .43 t-value 3.457 2.994 5.112 p-value .001 .003 .001

Goodness-of-fit statistics: w2 5.853, df 3, p .119, GFI .987, AGFI .936, TLI .972, CFI .992, RMSEA .073.

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relates to firm performance (b .29, t 3.457, p .001), providing support for hypothesis 1. As predicted by hypothesis 2, there is a positive relationship between CRM capability and performance (b .24, t 2.994, p .003). The results also indicate that CRM capability has a positive direct impact on innovation (b .43, t 5.112, p .001), supporting hypothesis 3. We also examined the mediating effect of innovation on the relationship between CRM and performance. To test meditation, we estimated the significance of the indirect and total effects of CRM capability on performance.1 The results show that innovation not only has a direct relationship with performance but also plays a mediating role in the relationship between CRM capability and performance. This is because the indirect effect of CRM on performance through innovation is statistically significant (b .17, p .001). The total effect of CRM on performance, which is the sum of the direct and indirect effects, is also significant (b .36, p .001).

Discussion and conclusion

The primary focus of this study was the simultaneous effects of CRM and innovation on firm performance. This study suggests that CRM is an antecedent to innovation, and that CRM and innovation simultaneously contribute to firm performance. The findings provide support for the proposed relationships between CRM, innovation, and firms superior performance. The results show that CRM capability contributes to firm performance, a finding that is consistent with previous research (e.g. Day & Van den Bulte, 2002; Hooley et al., 2005). CRM practices can be seen as a means to learn about customers needs and how best to create, satisfy, and sustain customers. CRM involves getting close to customers, understanding their needs and preferences, and determining how to profitably satisfy those needs. Satisfied and committed customers lead to lower marketing costs and increased revenues (Fung, Chen, & Yip, 2007). Consistent with previous studies (e.g. Baker & Sinkula, 1999; Calantone et al., 2002; Han et al., 1998; Hult et al., 2004; Hurley & Hult, 1998; Keskin, 2006; Panayides, 2006; Thornhill, 2006), our findings provide support for a positive relationship between innovation capability and performance. Indeed, innovation is a central strategy pursued by firms for creating value and gaining positional advantages in competitive markets (Weerawardena, OCass, & Julian, 2006). Firms with greater capacity to innovate are likely to be more successful in responding to their environments and developing new competences that lead to competitive advantage and superior performance (Hurley & Hult, 1998). General Electric, DuPont, Procter & Gamble, and Visa are all companies whose sustained success owes much to organisational innovation (Hamel, 2006). This study has shown that innovation capability is a missing link not previously conceptualised in the context of how CRM contributes to firm performance. The results provide support for the mediating effect of innovation on the relationship between CRM capability and performance. Customer knowledge is a competitive resource within a firm, and the ability to translate that knowledge into innovative products is considered to result in competitive performance (Thornhill, 2006). Superior-performing firms are those that can not only gain sufficient understanding
1 To test the significance of the mediation effect, we obtained total and indirect effects estimates and significance using the AMOS 6 Bootstrap Estimation procedure.

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of customer requirements and preferences, but can also use that knowledge and information to innovate products and services. A major finding of potential interest to managers is that successful development of innovations can be achieved not only when firms have the adequate financial resources but also when firms have the important attributes that actually facilitate innovation. A firms ability to develop a thorough understanding of customers needs, wants, and preferences is significant, an understanding that can be made through continuous communication with customers. Firms without such understanding are less likely to stand out in terms of innovation capability (Calantone et al., 2002). CRM capability provides a firm with a better understanding of customers current and potential needs, which subsequently increases the possibility of innovation generation. The failure of firms in product innovation should not be attributed mainly to their limited resources. Firms with more resources may have a greater ability to innovate (Sorescu, Chandy, & Prabhu, 2003). However, allocating resources is likely to be a helpful but not sufficient condition for innovation success. It may be possible for firms to fail even when they have resources, if they do not have broad, deep, and specific market knowledge (De Luca & Atuahene-Gima, 2007). Innovating firms should create an environment in which innovation can flourish (Thornhill, 2006). The capability of building close relationships with customers is an example of the organisational capabilities that the firm needs to have to enhance its ability to innovate.

Limitations and future research directions

Several limitations of our study can be noted to help guide future research. First, our data is cross-sectional. Cross-sectional studies suffer from an inability to determine the causes and effects of the variables investigated (Hill & Hansen, 1991). Although the hypothesised causal ordering is theoretically possible, the cross-sectional design limits our ability to draw causal inferences. Future research, therefore, could use longitudinal data to increase confidence in the causal nature of the relationships tested in this study. Second, innovation is a complex construct, and capturing all its facets in a single study is impossible (Damanpour & Schneider, 2006). Different authors use different operationalisations to capture innovation. We used an outcome-oriented measure of innovation. Other researchers, however, have developed a scale to measure innovation-oriented organisational culture (e.g. Hurley & Hult, 1998). Although we validated our measure of innovation, the existence of multiple methods to measure innovation warrants attention in future research. Future studies may benefit from the use of other measures to clarify the relationships examined in this study. Third, the data for this study was gathered from a single informant (i.e. CEOs or managing directors) who was likely to be one of the most knowledgeable about the characteristics of the organisation and its performance (Weerawardena et al., 2006). The most desirable data-collection procedure, however, is to collect data from multiple sources (Auh & Menguc, 2006). We recommend that future studies take a multiple-source data-collection approach (e.g. CEOs and marketing managers). Fourth, our sample is from a single country, which limits the generalisability of the findings. Future studies using data from other countries may help increase the generalisability of our findings. Finally, we recognise that other variables not examined in our study such as market orientation, learning orientation, and total quality management have been

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theorised as determinants of innovation and business performance, and may be used to supplement the variables included in this study.

References
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Appendix: Measures of constructs

Innovation
Our company is often first to the market with new services and products. We often introduce new ranges of services and products not previously offered by this company. We often add new services and products to our existing ranges. We often improve or revise existing services and products. We often change our services and products in order to reduce costs. We often reposition existing services and products.

CRM capability Relationship orientation:

We actively stress customer loyalty or retention programs (Reinartz et al., 2004). In our organisation, there is an openness to sharing information about customers (Day, 2002). Our employees are willing to treat different customers differently (Day, 2002). We systematically attempt to customise services and products based on the value of the customer (Reinartz et al., 2004).

Configuration:
We reward employees for building and deepening relationships with high-value customers (Reinartz et al., 2004).

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We can create customised offerings to our customers (Day, 2002). We are organised in a way to respond optimally to customer groups with different profitability (Reinartz et al., 2004). We have technologies that allow for one-to-one communications with potential customers (Reinartz et al., 2004).

Customer information:
We have comprehensive databases to give a full picture of our customers (Day, 2002) We integrate customer information across customer contact points (e.g. mail, telephone, Web, fax, face-to-face) (Reinartz et al., 2004). Our databases are designed to ensure data quality (Day, 2002). We continuously track customer information in order to assess the lifetime value of each customer (Reinartz et al., 2004). Our information systems are integrated across several functional areas (Jayachandran et al., 2005). We invest in technology to acquire and manage real time customer information and feedback (Reinartz et al., 2004).

Business performance Financial performance:

Profitability Return on investment

Market Performance:
Market share Customer satisfaction Customer retention Sales growth

About the authors

Moustafa Battor is a lecturer in marketing at the Faculty of Commerce, Tanta University in Egypt. He is currently doing his PhD at the University of Bradford. His current research interests include innovation, relationship marketing, organisational learning, and firm performance. Corresponding author: Moustafa Battor, Tanta University, Faculty of Commerce, Said Street 31515, Tanta, Egypt. E m.battor@yahoo.com Mohamed Battor is a research assistant in marketing at the Faculty of Commerce, Tanta University in Egypt. He received his MBA from Tanta University. Currently, he is doing his PhD at Malaya University in Malaysia. E mohamedbator@perdana.um.edu.my

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